O-LevelAccountingAccounting procedures7707/21 · Oct/Nov 2019 · Q220 Marks

Rod's financial year ends on 31 December. On 1 January 2020 Rod will purchase a new delivery vehicle for his business. The details are as follows: Cost $12000 Estimated economic life 3 years Estimated residual value $1500 Rod is undecided whether to charge depreciation on the new delivery vehicle by using the straight-line method or diminishing (reducing) balance method. If he decided to use the diminishing (reducing) balance method this would be at a rate of 50% per annum. REQUIRED

(a)Define the term 'depreciation'.[2]
(b)Calculate the depreciation which would be charged on the new delivery vehicle for each of the years 2020, 2021 and 2022 using the straight-line method and diminishing (reducing) balance method. Insert your answers in the table provided. Use the space provided on the next page to show your workings. | Year | Straight-line method () | Diminishing (reducing) balance method () | | :--- | :----------------------- | :---------------------------------------- | | 2020 | | | | 2021 | | | | 2022 | | |[4]
(c)Explain one advantage of using the straight-line method to depreciate the delivery vehicle.[2]
(d)Explain one advantage of using the diminishing (reducing) balance method to depreciate the delivery vehicle.[2]
(e)Explain how the annual depreciation would be calculated using the revaluation method.[2]
(f)Calculate the profit or loss on the sale of the old office computer.[2]
(g)State the entries Rod would make in his accounting records on 30 June 2019 to record the disposal of the old office computer. | account to be debited | $ | account to be credited | $ | | :-------------------- | :- | :--------------------- | :- |[6]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

[1] Is an estimate of the loss in value of a non-current asset (1)
[1] over its expected working life. (1)
[1] 2020 Straight-line 3500 }
[1] 2021 Straight-line 3500 }
[1] 2022 Straight-line 3500 }(1)
[1] 2020 Diminishing balance 6000 (1)
[1] 2021 Diminishing balance 3000 (1)OF
[1] 2022 Diminishing balance 1500 (1)OF
[1] The business will get equal usage (1) from the motor vehicle each year and therefore should charge equal depreciation (1).
[1] Accept other valid points.
[1] The net book value (1) of the delivery vehicle will be closer to the market value (1) than the straight line method.
[1] The profits will be more accurate. (1)
[1] Max2
[1] Accept other valid points.
[1] At the end of each year the closing valuation is compared with the opening valuation (1).
[1] The difference represents the depreciation for the year (1).
[1] Accept other valid points.
[1] 4400-2600 = 1800 – 225 (1)
[1] = 1575 – 900 = 675 loss (1)OF
[1] Disposal (Dr) 4400 (1)
[1] Office computer (Cr) 4400 (1)
[1] Provision for depreciation of office computer (Dr) 2825 (1)OF
[1] Disposal (Cr) 2825 (1)OF
[1] Bank (Dr) 900 (1)
[1] Disposal (Cr) 900 (1)

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